TQOTW: Potentially Exempt Transfers
I want to set up a discretionary trust for my grandchild with £100,000 cash but I have already gifted them £325,000 in cash directly so will I now have to pay inheritance tax if I set up this trust?

Making a gift into a discretionary trust is a chargeable lifetime transfer as per s2 IHTA 1984. The inheritance tax nil rate band available is £325,000 so only if you have already used up your nil rate band (NRB) in the last 7 years would inheritance tax would be payable – at 20% on the transfer of value into the trust.

A gift of cash from one individual to another is a potentially exempt transfer (PET) within s3A IHTA 1984 and does not utilize your nil rate band. Generally, these will only be within the scope of inheritance tax if the donor does not survive 7 years after making this gift making this a “failed PET”.

If there is a failed PET, then after allowing available annual exemptions (£3,000 pa) your available NRB would first be used against the failed PETs as the chargeable transfers are calculated in date order – s7 IHTA 1984. If there is only a single nil rate band available (I.e. there is no transferrable spousal/civil partner NRB), then this would mean part or all of the transfer to the trust would become chargeable depending on how much of the NRB has been used against the failed PETs.

At present, the earlier gift you made to your grandchild of £325,000 in cash was a PET so this would not affect the availability of your current NRB. Therefore, you do not have to pay any inheritance tax settling £100,000 into trust proving of course that you have not made any other chargeable transfers in the last 7 years prior to this.

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Tax Advice Consultant
0844 892 2470

Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. She is AAT and ATT qualified and is currently studying ACCA. Kia also has experience of working in industry.

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